##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM       TO
 Commission File Number 000-50667
 INTERMOUNTAIN COMMUNITY BANCORP
  Idaho
    
    82-0499463(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 231 N. Third Avenue, Sandpoint, Idaho 83864
 (208) 263-0505
 þ o
  o o þ
 o þ
  Class
    
    Outstanding as of May 9, 2006Common Stock (no par value)
    
    6,603,876




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##### 



Intermountain Community Bancorp
 FORM 10-Q
For the Quarter Ended March 31, 2006
 TABLE OF CONTENTS
 PART
I  Financial InformationItem 1 - Financial Statements (Unaudited)Consolidated Balance Sheets for March 31, 2006 and December 31, 2005Consolidated Statements of Income for the three months ended March 31, 2006 and 2005Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005Consolidated Statements of Comprehensive Income for the three months ended March 31,
2006 and 2005Notes to Consolidated Financial StatementsItem 2 - Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3 - Quantitative and Qualitative Disclosures About Market RiskItem 4 - Controls and ProceduresPART II  Other InformationItem 1 - Legal ProceedingsItem 1A
- Risk FactorsItem 2 - Unregistered Sales of Equity Securities and Use of ProceedsItem 3 - Defaults Upon Senior SecuritiesItem 4 - Submission of Matters to a Vote of Security HoldersItem 5 - Other InformationItem 6 - ExhibitsSignaturesEXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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##### Table of Contents



PART I  Financial Information
 
 Item 1
 Financial Statements  Intermountain Community Bancorp
 
 Consolidated Balance Sheets
(Unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    433
    
    
    $
    250Non-interest bearing and vault
    
    
    18,996
    
    
    
    23,625Restricted
    
    
    701
    
    
    
    774Federal funds sold
    
    
    16,490
    
    
    
    11,080Available for sale securities, at fair value
    
    
    79,583
    
    
    
    83,847Held to maturity securities, at amortized cost
    
    
    7,368
    
    
    
    6,749Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    1,774
    
    
    
    1,774Loans held for sale
    
    
    7,503
    
    
    
    5,889Loans receivable, net
    
    
    564,034
    
    
    
    555,036Accrued interest receivable
    
    
    4,635
    
    
    
    4,992Office properties and equipment, net
    
    
    17,539
    
    
    
    15,545Bank-owned life insurance
    
    
    7,169
    
    
    
    7,095Goodwill
    
    
    11,399
    
    
    
    11,399Other intangible assets
    
    
    1,008
    
    
    
    1,051Prepaid expenses and other assets, net
    
    
    5,919
    
    
    
    4,576Total assets
    
    $
    744,551
    
    
    $
    733,682LIABILITIES:Deposits
    
    $
    610,002
    
    
    $
    597,519Securities sold subject to repurchase agreements
    
    
    32,426
    
    
    
    37,799Advances from Federal Home Loan Bank of Seattle
    
    
    5,000
    
    
    
    5,000Cashiers checks issued and payable
    
    
    6,693
    
    
    
    6,104Accrued interest payable
    
    
    1,126
    
    
    
    1,074Other borrowings
    
    
    17,655
    
    
    
    16,527Accrued expenses and other liabilities
    
    
    3,495
    
    
    
    5,386Total liabilities
    
    
    676,397
    
    
    
    669,409Commitments and contingent liabilities
    
    
    
    
    
    
    STOCKHOLDERS EQUITY:Common stock, no par value; 24,000,000 shares authorized;
6,665,775 and 6,598,810 shares issued and 6,623,780 and
6,577,290 shares outstanding
    
    
    44,941
    
    
    
    43,370Accumulated other comprehensive income
    
    
    (1,589
    )
    
    
    (1,337
    )Retained earnings
    
    
    24,802
    
    
    
    22,240Total stockholders equity
    
    
    68,154
    
    
    
    64,273Total liabilities and stockholders equity
    
    $
    744,551
    
    
    $
    733,682
  3




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##### Table of Contents



Intermountain Community Bancorp
Consolidated Statements of Income
(Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005(Dollars in thousands, except pershare data)Interest income:Loans
    
    $
    11,607
    
    
    $
    7,541Investments
    
    
    1,021
    
    
    
    933Total interest income
    
    
    12,628
    
    
    
    8,474Interest expense:Deposits
    
    
    2,652
    
    
    
    1,613Other borrowings
    
    
    685
    
    
    
    449Total interest expense
    
    
    3,337
    
    
    
    2,062Net interest income
    
    
    9,291
    
    
    
    6,412Recovery of (provision for) losses on loans
    
    
    96
    
    
    
    (298
    )Net interest income after recoveries of and
provision for losses on loans
    
    
    9,387
    
    
    
    6,114Other income:Fees and service charges
    
    
    2,053
    
    
    
    1,724Bank owned life insurance
    
    
    75
    
    
    
    74Loss on sale of securities
    
    
    
    
    
    
    (39
    )Other
    
    
    312
    
    
    
    282Total other income
    
    
    2,440
    
    
    
    2,041Operating expenses
    
    
    7,704
    
    
    
    5,806Income before income taxes
    
    
    4,123
    
    
    
    2,349Income tax provision
    
    
    (1,561
    )
    
    
    (854
    )Net income
    
    $
    2,562
    
    
    $
    1,495Earnings per share  basic
    
    $
    0.35
    
    
    $
    0.24Earnings per share  diluted
    
    $
    0.33
    
    
    $
    0.22Weighted average shares outstanding  basic
    
    
    7,243,248
    
    
    
    6,274,305Weighted average shares outstanding  diluted
    
    
    7,686,467
    
    
    
    6,839,236
  4




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Intermountain Community Bancorp
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    2,562
    
    
    $
    1,495Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    480
    
    
    
    415Compensation expense related to stock and option grants
    
    
    30
    
    
    
    11Net amortization of premiums on securities
    
    
    71
    
    
    
    114Amortization
of unearned compensation  restricted stock
    
    
    29
    
    
    
    Excess tax benefit related to stock option exercises
    
    
    (20
    )
    
    
    (31
    )Tax benefit related to stock option exercises
    
    
    66
    
    
    
    Recoveries of and (provisions for) losses on loans
    
    
    (96
    )
    
    
    298Amortization of core deposit intangibles
    
    
    43
    
    
    
    48Loss on sale of securities
    
    
    
    
    
    
    39Loss on sale of loans
    
    
    
    
    
    
    27Gain on sale of other real estate owned
    
    
    
    
    
    
    (60
    )Net accretion of loan and deposit discounts and premiums
    
    
    (35
    )
    
    
    (50
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (75
    )
    
    
    (74
    )Change inLoans held for sale
    
    
    (1,614
    )
    
    
    865Accrued interest receivable
    
    
    357
    
    
    
    (153
    )Prepaid expenses and other assets
    
    
    (1,147
    )
    
    
    (580
    )Accrued interest payable
    
    
    52
    
    
    
    136Accrued expenses and other liabilities
    
    
    31
    
    
    
    137Net cash provided by operating activities
    
    
    734
    
    
    
    2,637Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    
    
    
    
    (4,557
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    2,020
    
    
    
    6,517Principal payments on mortgage-backed securities
    
    
    1,756
    
    
    
    3,078Purchases of held-to-maturity securities
    
    
    (649
    )
    
    
    (1,929
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    
    
    
    
    20Origination of loans, net of principal payments
    
    
    (8,860
    )
    
    
    (25,722
    )Proceeds from sale of loans
    
    
    
    
    
    
    1,278Purchase of office properties and equipment
    
    
    (1,345
    )
    
    
    (1,649
    )Net change in federal funds sold
    
    
    (5,410
    )
    
    
    7,555Purchase of FHLB stock
    
    
    
    
    
    
    (247
    )Proceeds from sales of other real estate owned
    
    
    
    
    
    
    294Net decrease in restricted cash
    
    
    73
    
    
    
    1,152Net cash used in investing activities
    
    
    (12,415
    )
    
    
    (14,210
    )
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Intermountain Community Bancorp
Consolidated Statements of Cash Flows (continued)
(Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005(Dollars in thousands)Cash flows from financing activities:Net increase in demand, money market and savings deposits
    
    $
    6,717
    
    
    $
    5,667Net increase in certificates of deposit
    
    
    5,759
    
    
    
    2,093Net change in repurchase agreements
    
    
    (5,373
    )
    
    
    (4,314
    )Net change in federal funds purchased
    
    
    
    
    
    
    7,400Excess tax benefit related to stock option exercises
    
    
    20
    
    
    
    31Proceeds from exercise of stock options
    
    
    112
    
    
    
    355Payments for fractional shares
    
    
    
    
    
    
    (2
    )Proceeds from FHLB borrowings
    
    
    
    
    
    
    7,000Net cash provided by financing activities
    
    
    7,235
    
    
    
    18,230Net change in cash and cash equivalents
    
    
    (4,446
    )
    
    
    6,657Cash and cash equivalents, beginning of period
    
    
    23,875
    
    
    
    14,202Cash and cash equivalents, end of period
    
    $
    19,429
    
    
    $
    20,859Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    3,279
    
    
    $
    1,912Income taxes
    
    
    450
    
    
    
    213Noncash investing and financing activities:Restricted stock issued
    
    
    435
    
    
    
    Purchase of land
    
    
    1,130
    
    
    
    
  6




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Intermountain Community Bancorp
Consolidated Statements of Comprehensive Income
(Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005(Dollars in thousands)Net income
    
    $
    2,562
    
    
    $
    1,495Other comprehensive income (loss):Change in unrealized losses on
investments, net of reclassification
adjustments
    
    
    (446
    )
    
    
    (1,232
    )Less deferred income tax provision
    
    
    194
    
    
    
    484Net other comprehensive loss
    
    
    (252
    )
    
    
    (748
    )Comprehensive income
    
    $
    2,310
    
    
    $
    747
  7




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Intermountain Community Bancorp
Notes to Consolidated Financial Statements
 1.
    
    Basis of Presentation:The foregoing unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these
financial statements do not include all of the disclosures required by accounting principles
generally accepted in the United States of America for complete financial statements. These
unaudited interim consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2005. In the
opinion of management, the unaudited interim consolidated financial statements furnished
herein include adjustments, all of which are of a normal recurring nature, necessary for a
fair statement of the results for the interim periods presented.The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities known to exist as of the date the financial statements are
published, and the reported amounts of revenues and expenses during the reporting period.
Uncertainties with respect to such estimates and assumptions are inherent in the preparation
of Intermountain Community Bancorps (Intermountains or  the Companys ) consolidated
financial statements; accordingly, it is possible that the actual results could differ from
these estimates and assumptions, which could have a material effect on the reported amounts
of Intermountains consolidated financial position and results of operations.2.
    
    Advances from the Federal Home Loan Bank of Seattle:The Company had an advance from the Federal Home Loan Bank of Seattle totaling $5.0 million
at March 31, 2006. The advance bears a fixed interest rate of 2.71% and matures on June 18,
2008.3.
    
    Other Borrowings:The components of other borrowings are as follows (in thousands):
 March 31,
    
    
    December 31,2006
    
    
    2005Term note payable(1)
    
    $
    8,279
    
    
    $
    8,279Term note payable(2)
    
    
    8,248
    
    
    
    8,248Term note payable(3)
    
    
    1,128
    
    
    
    Total other borrowings
    
    $
    17,655
    
    
    $
    16,527
 
 (1)
    
    In January 2003, Intermountain issued $8.0 million of debentures through its
subsidiary Intermountain Statutory Trust I. The debt associated with these securities
bears interest at 6.75%. Interest only payments have been made quarterly starting in
June 2004. The debt is callable by Intermountain in March 2008 and matures in March
2033.(2)
    
    In March 2004, Intermountain issued $8.0 million of debentures through its
subsidiary Intermountain Statutory Trust II. The debt associated with these securities
bears interest based on the London Interbank Offering Rate (LIBOR) with a beginning rate
of 3.91%, adjusted and paid quarterly (the rate at March 31, 2006 was 7.40%). The debt
is callable by Intermountain in March 2009 and matures in March 2034.(3)
    
    In February 2006, Intermountain entered into a note payable agreement to
purchase land in Sandpoint, Idaho. The debt associated with the land purchase bears
interest at 6.65% and matures in February 2026. The land was purchased for the building
of the planned Sandpoint Financial and Technical Center.Intermountains obligations under the above debentures issued by its subsidiaries
constitute a full and unconditional guarantee by Intermountain of the Statutory Trusts
obligations under the Trust Preferred Securities. In accordance with Financial
Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities (FIN No.
46R), the trusts are not consolidated and the debentures and related amounts are treated
as debt of Intermountain. 8




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4.
    
    Earnings Per Share:The following table presents the basic and diluted earnings per share computations:
 Three Months Ended March 31,(Dollars in thousands, except per share amounts)2006
    
    
    2005Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Avg.
    
    
    Per Share
    
    
    Net
    
    
    Avg.
    
    
    Per ShareIncome
    
    
    Shares(1)
    
    
    Amount
    
    
    Income
    
    
    Shares(1)
    
    
    AmountBasic computations
    
    $
    2,562
    
    
    
    7,243,238
    
    
    $
    0.35
    
    
    $
    1,495
    
    
    
    6,274,305
    
    
    $
    0.24Effect of dilutive
securities:Common stock
options
    
    
    
    
    
    
    443,229
    
    
    
    (0.02
    )
    
    
    
    
    
    
    564,931
    
    
    
    (0.02
    )Diluted computations
    
    $
    2,562
    
    
    
    7,686,467
    
    
    $
    0.33
    
    
    $
    1,495
    
    
    
    6,839,236
    
    
    $
    0.22
 
 (1)
    
    Weighted average shares outstanding have been adjusted for the
10% common stock dividend declared April 28, 2006, payable May 31, 2006 to shareholders of
record on May 15, 2006. 5.
    
    Operating Expenses:The following table details Intermountains components of total operating expenses:
 Three Months EndedMarch 31,2006
    
    
    2005(Dollars in thousands)Salaries and employee benefits
    
    $
    4,617
    
    
    $
    3,182Occupancy expense
    
    
    1,115
    
    
    
    942Advertising
    
    
    157
    
    
    
    131Fees and service charges
    
    
    219
    
    
    
    303Printing, postage and supplies
    
    
    352
    
    
    
    292Legal and accounting
    
    
    290
    
    
    
    292Other expense
    
    
    954
    
    
    
    664Total operating expenses
    
    $
    7,704
    
    
    $
    5,806
 6.
    
    Equity Compensation Plans:Effective January 1, 2006, the Company has adopted FASB Statement No. 123 (R), Share-Based
Payment. Statement 123 (R) requires that compensation cost relating to share-based payment
transactions be recognized in financial statements. The cost is measured based on the fair
value of the equity or liability instruments issued. Statement 123 (R) covers a wide range
of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans.
Statement 123 (R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation
and supersedes APB Opinion No. 25, Accounting For Stock Issued to Employees. Statement
123, as originally issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25, as long as
the footnotes to financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. The impact of Statement 123 (R), if it had
been in effect, on the net earnings and related per share amounts for the years ended
December 31, 2005, 2004 and 2003 was disclosed in the Companys Form 10-K for the fiscal
year ended December 31, 2005.
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Because the Company adopted Statement 123 (R) using the modified prospective transition
method, prior periods have not been restated. Under this method, the Company is required to
record compensation expense for all awards granted after the date of adoption and for the
unvested portion of previously granted awards that remain outstanding as of the beginning of
the period of adoption. The Company measured share-based compensation cost
using the Black-Scholes option pricing model for stock option grants prior to January 1,
2006 and anticipates using this pricing model for future grants. The Company did not grant
options in the first quarter of 2006. Forfeitures did not affect the calculated expense
based upon historical activities of option grantees.The Company utilizes its stock to compensate employees and Directors under the 1999 Director
Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan (together the Stock
Option Plans). Options to purchase Intermountain common stock have been granted to
employees and directors under the Stock Option Plans at prices equal to the fair market
value of the underlying stock on the dates the options were granted. The options vest 20%
per year, over a five-year period, and expire in 10 years. At March 31, 2006, there were
220,351 shares available for grant. The Company did not grant options to purchase
Intermountain common stock during either the three months ended March 31, 2006 or 2005.Total expense related to stock option grants and restricted stock grants
recorded in the three months ended March 31, 2006 and 2005 was $48 thousand and $0,
respectively.For the periods ended March 31, 2006 and 2005, stock option expense totaled $29 thousand and
$0, respectively. The Company has approximately $380 thousand remaining to expense related
to the non-vested stock options outstanding at March 31, 2006. This expense will be recorded
over a weighted average period of 23.7 months. The expense for the stock option expense was
based on the fair value of options granted calculated using the Black-Scholes valuation
model per FAS 123R. Assumptions used in the Black-Scholes option-pricing model for options
issued in years prior to 2005 are as follows:
 Dividend yield
    
    0.0%Expected volatility
    
    17.0% - 46.6%Risk free interest rates
    
    4.0% - 7.1%Expected option lives
    
    5 - 10 yearsForfeitures
    
    0.0%
 In 2003, shareholders approved a change to the 1999 Employee Option Plan to provide for the
granting of restricted stock awards. The Company has granted restricted stock to directors
and employees beginning in 2005. The restricted stock vests 20% per year, over a five-year
period. The Company granted 20,440 and 0 restricted shares with an intrinsic value of $434
thousand and $0, during the three months ended March 31, 2006 and 2005, respectively. For
the periods ended March 31, 2006 and 2005, restricted stock expense totaled $19 thousand and
$0, respectively.A summary of the changes in stock options outstanding for the three months ended March 31,
2006 is presented below:
 Three months ended March 31
    
    2006(dollars in thousands, except per share amounts)Weighted
    
    
    WeightedNumber
    
    
    Average
    
    
    Average
    
    
    Aggregateof
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Price
    
    
    life(Years)
    
    
    ValueBeginning Options Outstanding
    
    
    576,942
    
    
    $
    6.26Options Granted
    
    
    
    
    
    
    Exercises
    
    
    20,488
    
    
    
    5.49
    
    
    
    
    
    
    $
    310Ending options outstanding
    
    
    556,454
    
    
    
    6.29
    
    
    
    5.0
    
    
    
    9,192Exercisable at March 31
    
    
    465,866
    
    
    $
    5.60
    
    
    
    4.1
    
    
    $
    7,282
 10




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The following table provides additional details regarding exercises of stock option for the
three months ended March 31, 2006 and 2005:
 Three Months EndedMarch 31,2006
    
    2005(Dollars in thousands)Number of options exercised
    
    
    20,488
    
    
    
    73,192Cash Received
    
    $
    112
    
    
    $
    355Tax Benefit-Based on Black-Scholes fair value
    
    
    61
    
    
    
    107-Benefit in excess of Black-Scholes fair value
    
    
    20
    
    
    
    31Intrinsic Value
    
    
    310
    
    
    
    917
 7.
    
    Subsequent Events:At the annual shareholder meeting held on April 28, 2006, Intermountain announced a 10%
stock dividend effective May 31, 2006 to shareholders of record as of May 15, 2006.On April 28, 2006, the Board of Directors approved a new 2006-2008 Long Term Incentive Plan
(LTIP) for certain executive officers. The purpose of the plan is to provide motivation
and direction to key executives and assist Intermountain in achieving its long-term
strategic goals. Payments under the LTIP will be based on a three-year (from 2006 through
2008) running average of Intermountains average annual return on equity and average annual
net asset growth. The payments will be made in the form of Intermountain stock pro-rata
with the first payment beginning on January 2, 2009. The first payment will vest
immediately upon the date of grant, with the second and third portion vesting in January
2010 and January 2011, respectively. In order to be eligible to receive a stock award, the
key executives must have been continuously employed by Panhandle State Bank from 2006
through 2008. In addition, to receive the award, they must be employed by the Bank on the
dates in which each portion vests. In the event of an executives disability or death or a
change in control (as defined) of Panhandle State Bank, the stock award benefit will vest,
on a pro rata basis, through the most recent quarter end. If employment is otherwise
voluntarily or involuntarily terminated prior to an executives receipt of stock benefits,
such executives right to an awards under the plan will automatically terminate.8.
    
    New Accounting Policies:On June 1, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No.154).SFAS No. 154
applies to all voluntary changes in accounting principle and changes the requirements for
accounting and reporting of a change in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the pronouncement does
not include specific transition provisions. SFAS No. 154 requires retrospective application
for voluntary changes in accounting principle, unless it is impracticable to determine
either the cumulative effect or the period-specific effects of the change. The requirements
became effective for the Company for accounting changes beginning January 1, 2006. The
Company has adopted SFAS No. 154.In March 2006, the FASB issued SFAS 156 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140(SFAS No. 156). SFAS No. 156 requires an entity to
recognize a servicing asset or liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract. It requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair value. SFAS No.
156 permits an entity to choose either an amortization or fair value measurement method for
each class of separately recognized servicing assets and servicing liabilities. It also
permits a one-time reclassification of available-for-sale securities to trading securities
by entities with recognized servicing rights. Lastly, it requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value and
additional disclosures for all separately recognized servicing assets and servicing
liabilities. Adoption of the initial measurement provision of this statement is required
immediately. The adoption of this provision had no significant effect on the Companys
Consolidated Financial Statements. The Company is required to adopt all other provisions of
this statement beginning in 2007 although earlier adoption was permitted in 2006 prior to
filing of an entitys first financial report for that year. The Company has not adopted the
remaining provisions of SFAS No. 156 in 2006. Management is currently evaluating the impact
that the adoption of the remaining provisions of SFAS No. 156 will have on its consolidated
financial statements.
 11




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 This report contains forward-looking statements. For a discussion about such statements,
including the risks and uncertainties inherent therein, see Forward-Looking Statements.
Managements Discussion and Analysis of Financial Condition and Results of Operations should be
read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in
this report and in Intermountains Form 10-K for the year ended December 31, 2005.
 General
       12




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Critical Accounting Policies
  Income Recognition .
 Allowance For Loan Losses.
    Investments .
  13




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##### Table of Contents



Goodwill and Other Intangible Assets .
  Real Estate Owned.
  Intermountain Community Bancorp
Comparison of the Three Month Periods Ended March 31, 2006 and 2005
 Results of Operations
 Overview
  Net Interest Income
 14




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##### Table of Contents



Provision for Losses on Loans.
   Three Months Ended March 31,2006
    
    
    2005(Dollars in thousands)Balance at January 1
    
    $
    8,517
    
    
    $
    6,902Allowance associated with the sale of loans
    
    
    
    
    
    
    (96
    )Provision (recovery) for losses on loans
    
    
    (96
    )
    
    
    298Amounts (written off) net of recoveries
    
    
    (26
    )
    
    
    19Balance at March 31
    
    $
    8,395
    
    
    $
    7,123
  Other Income.
 Operating Expenses
  15




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##### Table of Contents



Income Tax Provision
 Financial Position
 Assets
 Investments.
 Loans Receivable
  March 31, 2006
    
    
    December 31, 2005Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial (includes commercial real estate)
    
    $
    433,205
    
    
    
    75.56
    
    
    $
    425,005
    
    
    
    75.28Residential real estate
    
    
    108,044
    
    
    
    18.85
    
    
    
    107,554
    
    
    
    19.05Consumer
    
    
    29,402
    
    
    
    5.13
    
    
    
    29,109
    
    
    
    5.16Municipal
    
    
    2,640
    
    
    
    0.46
    
    
    
    2,856
    
    
    
    0.51Total loans receivable
    
    
    573,291
    
    
    
    100.00
    
    
    
    564,524
    
    
    
    100.00Net deferred origination fees
    
    
    (862
    )
    
    
    
    
    
    
    (971
    )Allowance for losses on loans
    
    
    (8,395
    )
    
    
    
    
    
    
    (8,517
    )Loans receivable, net
    
    $
    564,034
    
    
    
    
    
    
    $
    555,036Weighted average yield at end of period
    
    
    8.22
    %
    
    
    
    
    
    
    7.90
    %
 16




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005
    
    
    % Change(Dollars in thousands)Commercial
    
    $
    65,458
    
    
    $
    90,830
    
    
    
    (27.9
    )Residential real estate
    
    
    18,881
    
    
    
    18,982
    
    
    
    (0.5
    )Consumer
    
    
    3,513
    
    
    
    7,035
    
    
    
    (50.1
    )Municipal
    
    
    50
    
    
    
    50
    
    
    
    0.0Total loans originated
    
    $
    87,902
    
    
    $
    116,897
    
    
    
    (24.8
    )
 BOLI and All Other Assets
 Deposits
  March 31, 2006
    
    
    December 31, 2005Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Demand
    
    $
    125,401
    
    
    
    20.6
    
    
    $
    132,440
    
    
    
    22.2NOW and money market 0.0% to 5.3%
    
    
    226,290
    
    
    
    37.1
    
    
    
    216,034
    
    
    
    36.2Savings and IRA 0.0% to 3.8%
    
    
    77,263
    
    
    
    12.7
    
    
    
    73,763
    
    
    
    12.3Certificate of deposit accounts
    
    
    181,048
    
    
    
    29.6
    
    
    
    175,282
    
    
    
    29.3Total deposits
    
    $
    610,002
    
    
    
    100.0
    
    
    $
    597,519
    
    
    
    100.0Weighted average interest rate
on certificates of deposit
    
    
    
    
    
    
    3.76
    %
    
    
    
    
    
    
    3.45
    %
 Borrowings
 Interest Rate Risk
  17




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##### Table of Contents



Net Interest Income
 18




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##### Table of Contents



Liquidity and Sources of Funds
     Capital Resources
     19




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##### Table of Contents



Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to
risk-weighted assets):The Company
    
    $
    64,704
    
    
    
    9.81
    %
    
    $
    52,771
    
    
    
    8
    %
    
    $
    65,963
    
    
    
    10
    %Panhandle State Bank
    
    
    79,225
    
    
    
    12.01
    %
    
    
    52,771
    
    
    
    8
    %
    
    
    65,963
    
    
    
    10
    %Tier I capital (to risk-weighted
assets):The Company
    
    
    56,457
    
    
    
    8.56
    %
    
    
    26,385
    
    
    
    4
    %
    
    
    39,578
    
    
    
    6
    %Panhandle State Bank
    
    
    70,978
    
    
    
    10.76
    %
    
    
    26,385
    
    
    
    4
    %
    
    
    39,578
    
    
    
    6
    %Tier I capital (to average assets)The Company
    
    
    56,457
    
    
    
    7.77
    %
    
    
    29,068
    
    
    
    4
    %
    
    
    36,335
    
    
    
    5
    %Panhandle State Bank
    
    
    70,978
    
    
    
    9.77
    %
    
    
    29,054
    
    
    
    4
    %
    
    
    36,318
    
    
    
    5
    %
 Off Balance Sheet Arrangements and Contractual Obligations
   Payments Due by PeriodLess than
    
    
    
    
    
    
    Over
    
    
    More thanTotal
    
    
    1 year
    
    
    1 to 3 years
    
    
    3 to 5 years
    
    
    5 years(Dollars in thousands)Long-term debt(1)
    
    $
    50,006
    
    
    $
    1,305
    
    
    $
    7,708
    
    
    $
    2,543
    
    
    $
    38,450Short-term debt (1)
    
    
    32,430
    
    
    
    32,430
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    5,479
    
    
    
    617
    
    
    
    1,060
    
    
    
    680
    
    
    
    3,122Purchase obligations(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term
liabilities reflected on the
registrants balance sheet
under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    87,915
    
    
    $
    34,352
    
    
    $
    8,768
    
    
    $
    3,223
    
    
    $
    41,572
 
 (1)
    
    Includes interest payments.(2)
    
    Excludes recurring accounts payable, accrued expenses and other liabilities, repurchase
agreements and customer deposits, all of which are recorded on the Companys balance sheet. 20




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##### Table of Contents



New Accounting Policies
 SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3 ( SFAS No.154 ) . Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3 ( ).
 SFAS
No. 156, Accounting for Servicing of Financial Assets  an amendment of FASB Statement
No. 140 (SFAS No. 156 ).
 Forward-Looking Statements
   
    
    the strength of the United States economy in general and the
strength of the local economies in which Intermountain conducts its operations;
    
    the effects of inflation, interest rate levels and market and
monetary fluctuations;
    
    trade, monetary and fiscal policies and laws, including
interest rate policies of the federal government;
 21




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##### Table of Contents




    
    applicable laws and regulations and legislative or regulatory
changes;
    
    the timely development and acceptance of new products and
services of Intermountain;
    
    the willingness of customers to substitute competitors
products and services for Intermountains products and services;
    
    Intermountains success in gaining regulatory approvals, when
required;
    
    technological and management changes;
    
    growth and acquisition strategies;
    
    Intermountains ability to successfully integrate
entities that may be or have been acquired;
    
    changes in consumer spending and saving habits; and
    
    Intermountains success at managing the risks involved in the
foregoing.
 
 Item 3   Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Controls
 
 PART II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1A
 Risk Factors
  22




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##### Table of Contents



Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
  
 Item 6  Exhibits
 Exhibit No.
    
    Exhibit10.1
    
    2006-2008 Long Term Incentive Plan31.1
    
    Certification of Chief Executive
Officer Pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.31.2
    
    Certification of Chief Financial
Officer Pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.32
    
    Certification of Chief Executive
Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of
the Sarbanes Oxley Act of 2002.
 23




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##### Table of Contents



Signatures
  INTERMOUNTAIN COMMUNITY BANCORP 
                              (Registrant)May 11, 2006
    By:
    /s/ Curt HeckerDate
    
    Curt HeckerPresident
and Chief Executive OfficerMay 11, 2006
    By:
    /s/ Doug WrightDate
    
    Doug WrightExecutive Vice President
and Chief Financial Officer 24